10th Cir. Affirms Refusal to Compel Arbitration as to Non-Signatory Third Parties

The U.S. Court of Appeals for the Tenth Circuit recently affirmed a trial court’s denial of a motion to compel arbitration against non-signatory third-party beneficiaries who did not accept the benefits of the contract.

A copy of the opinion in Jacks v. CMH Homes is available at:  Link to Opinion.

In 2009, a buyer financed a mobile home purchase with a manufactured-home retail installment contract.  The contract contained an arbitration provision that purportedly extended to “all co-signors and guarantors … and any occupants of the manufactured home.”

Five years later, the buyer and her family sued the home’s manufacturer and the lender.  The buyer and her family alleged that defects in the home caused toxic mold, rendering the home unfit for habitation.  The buyer and her family sought rescission of the manufactured home purchase.

The defendants moved to compel arbitration and argued that the buyer’s husband and their children were bound by the arbitration agreement, even though they never signed the contract.  The trial court granted the defendants’ motion to compel the buyer’s claims but denied it with respect to those claims asserted by the buyer’s family.

The Tenth Circuit affirmed the trial court’s refusal to compel arbitration as to the buyer’s family.

The Tenth Circuit first noted that the nonsignatory plaintiffs were not third-party beneficiaries of the contract as a whole.  Instead, they were third-party beneficiaries only to the contract’s arbitration clause.

The Tenth Circuit then rejected the defendants’ arguments that the arbitration clause applied to the buyer’s family as third-party beneficiaries.  The Tenth Circuit reasoned that a “contract (here, the arbitration agreement) [cannot] be enforced against an intended third-party beneficiary who has not accepted the benefit (here, the right to compel arbitration).”

The Tenth Circuit also rejected the defendants’ arguments that the buyer’s family was bound to arbitrate their claims under the doctrine of equitable estoppel.

The defendants first advanced an “integrally-related-claim estoppel” theory.  Specifically, the defendants argued that all of the plaintiffs were subject to the contract’s arbitration clause because the buyer’s claims and her family’s claims were identical, and thus, integrally related to the contract.

The Tenth Circuit rejected the defendants’ argument, holding that the “integrally-related-claim estoppel” theory (or “intertwined claims” theory) does not apply “where a signatory-defendant seeks to compel arbitration with a nonsignatory-plaintiff.”

The defendants also argued that the buyer’s family was required to arbitrate their claims based on the “direct-benefit estoppel doctrine,” which “applies when a nonsignatory knowingly exploits the agreement containing the arbitration clause.”

As you may recall, “[u]nder ‘direct benefits estoppel,’ a non-signatory plaintiff seeking the benefits of a contract is estopped from simultaneously attempting to avoid the contract’s burdens, such as the obligation to arbitrate disputes.” However, the Tenth Circuit found that the defendants waived their “direct-benefit estoppel” theory by not arguing it before the trial court.

Thus, the Tenth Circuit affirmed the trial court’s ruling.

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Patrick R. Tira is based in Maurice Wutscher's San Diego office, where he practices in the firm's Commercial Litigation, Consumer Credit Litigation, Business Formation and Transactions, Intellectual Property Litigation, and Employment Litigation groups. He has extensive litigation experience in matters involving a wide variety of complex real estate and business disputes, ranging from post-foreclosure evictions and real estate fraud to misappropriation of trade secrets claims and shareholder disputes. He is experienced in all stages of litigation and has recovered millions for his clients in judgments and arbitration awards. In addition to his success in the courtroom, Patrick advises internet and other technology companies, real estate investors, medical professionals, and other businesses on an array of transactional matters. For example, he has extensive experience counseling clients on entity formation, licensing and service-level agreements, real estate agreements, internal policies and procedures, and related matters. Patrick employs his litigation experience to appropriately structure internal policies and procedures, licensing and service-level agreements, ownership and other agreements, and also to anticipate where disputes may arise in the future. He strives to enable his clients to achieve their goals and to avoid potential litigation.